Oct. 8–Bank of America, which is accused of helping a large hedge fund make illegal late trades in mutual funds, will reimburse investors outside the bank’s Nations Funds who lost money because ofthe practice. But the amount they will receive has yet to be determined.
Caught up in New York Attorney General Eliot Spitzer’s investigation into the mutual fund industry, Bank of America’s brokerage service allegedly allowed Canary Capital Partners hedge fund to make illegal after-hours trades in various mutual funds, including its own Nations Funds.
Previously, Bank of America said it would provide restitution to Nations Funds investors affected by both Canary’s market timing and late-trading activities. Yesterday, the Charlotte, N.C.-based bank expanded its reimbursement promise to include shareholders of the other mutual funds if payments from Canary or others do not make them whole. As part of its settlement with Spitzer last month, Canary agreed to pay $30 million in restitution, as well as $10 million in fines.
“We will provide restitution of last resort,” said Robert Stickler, a Bank of America spokesman.
Any losses in non-Nations Funds will have to be determined by regulators or the other fund companies, he said. The bank’s trustees have hired Willkie Farr & Gallagher to review the impact of the practices within the Nations’ Funds and “put a number on it,” Stickler said.
It is too early to determine the cost of the reimbursements, he said.
According to Spitzer’s complaint, Canary engaged in illegal after-hours trading through Bank of America and in improper market timing trading in Nations Funds, as well as funds run by Bank One, Strong and Janus. The latter three also have agreed to make restitution to any affected investors within their own funds because they bent their internal rules to allow Canary to market time, which is not illegal.
Reimbursing shareholders, however, may prove very difficult, experts said.
“There are a zillion holders out there,” said securities lawyer Lance Myers, a partner at Holland & Knight in Manhattan.
First, the companies have to determine when the market timing practices occurred. Then they have to figure out who owned the funds during that time. Finally, they have to assess how much the other shareholders lost because of Canary’s market timing practices.
“It remains to be seen if investors will be made whole or not,” said Marc I. Steinberg, securities law professor at Southern Methodist University’s Dedman School of Law in Dallas.
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